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Description/Abstract

This paper adds a land market to a standard Harris-Todaro framework. In the standard model, the equilibrating force that limits rural-urban migration is a decline in the probability of formal employment, which follows from enlargement of the informal sector. The key insight of the present paper, borrowed from Brueckner (1990) [Brueckner, J.K., 1990. Analyzing Third World urbanization: A model with empirical evidence. Economic Development and Cultural Change 38, 587–610], is that urban land-rent escalation provides an additional force that limits the extent of migration. The most striking implication of this modified model is that formal-sector growth may not lead to additional migration from rural areas. The reason is that, because of land-rent escalation, such growth may depress a migrant's expected utility despite the improved chance of obtaining a formal job. In the second part of the analysis, the efficiency-wage model is used to make wages and employment in the formal sector endogenous instead of fixed. While many comparative-static effects are ambiguous in this more-complex model, the role of the land market is basically unaffected.